[2024] KETAT 1487 (KLR)

Kenya Tea Development Agency Dubai Multi Commodities Centre v Commissioner of Domestic Taxes (Tax Appeal E387 of 2023) [2024] KETAT 1487 (KLR) (25 October 2024) (Judgment)

Neutral citation: [2024] KETAT 1487 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E387 of 2023

CA Muga, Chair, BK Terer, D.K Ngala & SS Ololchike, Members

October 25, 2024

Between

Kenya Tea Development Agency Dubai Multi Commodities Centre

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Introduction 1. The Appellant is private limited company incorporated in Dubai, the United Arab Emirates and carrying on the business of buying and selling Kenyan tea in Gulf and Middle East. The Appellant is a subsidiary of Chai Trading Company Limited which is a subsidiary of Kenya Tea Development Holdings Plc.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 and 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. Sometime in 2021, the Respondent conducted an audit of the Appellant and its parent company, Chai Trading Company Limited (hereinafter “CTCL”) for the period 2015-2021. The Respondent issued a letter of its preliminary findings on 9th December, 2022 and on 17th February 2023, the Appellant responded to the findings.

4. The Respondent thereafter, on 15th March, 2023 issued a default notice assessment for the amount of Kshs. 120,093,511. 00 which the Appellant objected to on 12th April, 2023. The Respondent issued its objection decision on 9th June, 2023 confirming the tax assessments for the periods 2018 to 2020 amounting to Kshs. 122,672,965. 00.

5. Aggrieved by the Respondent's decision, the Appellant lodged its Notice of Appeal dated 27th June, 2023 on 3rd July, 2023.

The Appeal 6. The Appeal as contained in the Memorandum of Appeal dated 13th July, 2023 and filed on 14th July, 2023 was predicated on the following grounds:a.That the Respondent erred in law and fact by holding that the Appellant was a resident in Kenya for purposes of tax for the years 2018-2020. b.That the Respondent erred in law and fact by holding that the Appellant carried on or exercised its business partly within and partly outside Kenya.c.That the Respondent erred in law and fact by holding that the law required the Appellant to impose withholding tax on management fees and other payments.d.That the Respondent erred in law and fact by failing to appreciate the nature of the Appellant's business thereby treating the Appellant as a Kenyan as well as carrying on or exercising business partly within and partly outside Kenya.e.That the Respondent misapplied the law thereby arriving at an erroneous decision by confirming assessments.

The Appellant’s Case 7. The Appellant set out its case in its Statement of Facts dated 13th July, 2023 and filed on 14th July, 2023 in which it stated as follows:

8. The Appellant was established in Dubai as a branch of CTCL, a Kenyan Company. It became a fully owned subsidiary of CTCL in 2014. The Appellant stated that it was not resident in Kenya and did not derive or accrue income in Kenya for period 2021 -2022. The Respondent, in its objection decision held that the Appellant is a tax resident company in Kenya and affirmed the default tax assessment against it.

9. According to the default notice, the Appellant was a company resident in Kenya for tax purposes for the years 2018-2020 on account of the "control and management" test under section 2(1) of the Income Tax Act CAP 470 of the Laws of Kenya(hereinafter “ITA”) and the "place of effective management" test under article 4(1) of the Agreement between the Republic of Kenya and the Government of the United Arab Emirates for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter “the Treaty”).

10. In addition to the "control and management" test and the "place of effective management" set out in paragraph 6 of the default notice, the Respondent asserted that the whole of the gains or profits of the Appellant were "accrued in or were derived from Kenya" on the basis that the Appellant's business was carried on or exercised partly within and partly outside Kenya in terms of section 4(a) of the ITA.

11. The Appellant averred that the Respondent erred in law and fact by failing to appreciate the nature of the its business thereby treating the Appellant as a Kenyan resident as well as carrying on or exercising business partly within and partly outside Kenya. The Articles of Association of the Appellant allow its directors to delegate their powers as they think fit and such a person shall exercise the powers to, among others, exclusion of the directors.

12. The Appellant, on the basis of the provisions of its Articles of Association, vested a broad and wide array of powers on the regional manager through a power of attorney. The regional manager based in the United Arab Emirates (hereinafter “UAE”) was the loci of and nerve center of the Appellant's key policy and strategic decisions and these key policy and strategic decisions are made in the UAE and were executed and implemented by the regional manager.

13. The regional manager held high level meetings with tax advisors, financial experts, and accountants in UAE and from these meetings, he made decisions on policy and strategies to be adopted for the Appellant’s operations to ensure compliance with the law and commercial advantage for the Appellant. The regional manager sat in and attended all board meetings of the Appellant and was instrumental in the decisions the board made.

14. The Appellant signed a service level agreement with CTCL under which the latter offers several services to the Appellant including warehousing, storage, packaging, and delivery of tea. The Appellant pays CTCL for the services it receives, and the payments are at arm's length and competitive so the Appellant cannot be viewed as an agent of the CTCL.

15. The Appellant averred that it had management both in Kenya and Dubai but was effectively managed from Dubai in substance as its high-level decisions were made by its regional manager and only subject to ratification by the Board of directors who only met thrice every year. This is supported by the board meetings and the deliberations that took place in these meetings.

16. The Appellant was a foreign subsidiary carrying on bona fide foreign operations in Dubai. The day-to-day operations were conducted in Dubai. The Appellant entered contracts and had bank accounts in Dubai for which the regional manager was an authorized signatory. The relationship between Appellant and its parent could not be used as a basis for determining residency of the Appellant. The two entities had a commercial relationship and did enter into a service agreement with CTCL and provided services for which the Appellant paid.

17. The Appellant stated that the evidence on record was sufficient to confirm that it was not resident in Kenya for the above indicated years of income because its place of effective management was in Dubai. Based on the above analysis, the Appellant submitted that the Respondent's demand for corporation tax and withholding tax for the period 2018 to 2020 as outlined in the confirmed assessments had no basis in fact or in law, and prayed that the Tribunal would set aside the Respondent’s assessment in its entirety and that the Appeal would be allowed.

Respondent’s Case 18. The Respondent’s case was as set out in its statement of facts dated 4th August, 2023 and filed on 7th August, 2023 in which it stated that the Appellant was set up in 2014 and its principal business activity was buying and selling teas for specific customers in the Gulf, Middle East and the Common Wealth of Independent states.

19. The Respondent asserted that the conversion of the Appellant from a branch to a Company was done following a transfer pricing tax planning scheme orchestrated by the Appellant’s management and parent company to shift income from Direct Sales Overseas (hereinafter “DSO”) line of business to the Appellant. This scheme shifted profits to UAE.

20. The Respondent having reviewed the operations of the Appellant for the period 2015 to 2020 found that the Appellant was deemed to be tax resident in Kenya by virtue of the management and control of its affairs being exercised in Kenya.

21. The Respondent identified five issues for determination which it proceeded to analyze as follows:

a. Whether the management and control of the Appellant's affairs was exercised in Kenya during the period 2018 to 2020 22. The Appellant's Board of Directors is composed of Kenyan residents. The Respondent, in its submissions listed the Board of Directors during the period 2018 to 2020.

23. As evidenced by the Board of Directors meeting minutes, the Appellants directors sitting in Kenya were involved in the day-to-day running of its affairs whilst in Kenya. The major discussion points of the Board of Directors meetings were; reviews of the performance of the Appellant, reviews of the credit policies and debt management, and market expansion strategies.

24. Further, the Appellant’s management team sat in Kenya and managed the affairs of the Appellant in performing the following functions in Kenya: Negotiation and execution of agreements with customers; Accounting and bookkeeping;

Strategy and budgeting;

Human resources management;

Financial support and Debt collection;

Running of bank accounts in Dubai and Nairobi; Payment of regional manager through KTAH; and Approval of customers and customer orders.

25. Even though the concept of Management and control has not been defined in the Kenyan tax laws, this term has been subjected, to significant judicial interpretation under English law. In broad terms, the term 'management and control' has been determined by English law to mean -making decisions about the strategic policy and direction of a company. In the case of Bullock vs. Unit Construction Company (1959) 38 TC 712, the court held that the issue of management and control is a pure question of fact, to be determined upon scrutiny of the course of business and trading.

26. Citing the case of Union Corporation Ltd vs. Commissioner of Inland Revenue 34 TC 207, the Court further stated as follows:“The Company may be properly found to reside in a country where it -really does business that is to say, where the controlling power and authority which according to the ordinary constitution of a limited liability company, is vested in its board of directors, and the exercise of that power and the authority, is to some substantial degree to be found.”

27. The Respondent relied on the decision rendered by the Tribunal in TAT No 934 Of 2022 Naivas Kenya Ltd Vs Commissioner of Domestic Taxes. The relevant consideration for the place of management is where high-level decision-making occurs or is made from. It was clear that the Appellant's Directors and CTCL's Managers sitting in Kenya were involved in contracting with customers and formulating pricing strategies and financing policies. To further expound on place of effective management and control, the Respondent relied on the decision in Laerstate BV vs The Commissioners for Her Majesty's Revenue and Customs.

b. Whether the Appellant was a tax resident in Kenya by virtue of the management and control of its affairs being exercised in Kenya in the period 2018 to 2020 as outlined in Section 2 of the ITA. 28. In reliance on the evidence adduced, the Respondent deemed the Appellant as tax resident in Kenya during the period 2018 to 2020 since it observed that the management and control of its affairs was being exercised in Kenya during this period.

29. The Respondent averred that for tax purposes, a corporate's residence is the place where that corporate is subject to unrestricted tax liability. The factual connection between corporate and tax laws is found by considering the relevant management decisions of the corporation, the persons who take the decision, and the place where he makes the decision. The nature of a corporation and the type of its business determine the form and frequency of its strategic decision.

30. Section 2 of ITA defines who is "resident" for tax purposes. This Section states that a corporation (a body of persons) is tax resident in Kenya if:i.……………….orii.that the management and control of the affairs of the body was exercised in Kenya in a particular year of income under consideration; oriii.……………..”

31. The Respondent averred that for a body corporate to be resident in Kenya it has to satisfy one of the set tax residency criteria set out in Section 2 of the ITA. Notwithstanding that the Appellant is a company incorporated in UAE it was evident that the management and control of its affairs was exercised in Kenya through its parent company and the Board of Directors. The Respondent averred that Article 4 of the Treaty, determines who is resident in a contracting state. Articles 4(1)(a) of the Treaty states as follows:“For the purpose of this Agreement, the term "resident of a Contracting State" means:a.In the case of Kenya, any person who under the laws of Kenya, is liable to tax therein because of his domicile, residence, place of effective management, place of incorporation, or any other criterion of a similar nature…"

32. The Appellant was a tax resident in UAE and Kenya by virtue of "incorporation" and place of effective management, respectively. However, Article 4(4) of the Treaty provides a rule on how residency is determined in the case of dual residency. The Article states as follows:“Where because of the provisions of paragraph 1 of this Article a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident of the State in which its place of effective management is situated.”

33. The Respondent averred that Paragraph 24. 1 of the commentary to Article 4 of the OECD Model Tax Convention on Income and on Capital Gains (OECD MTC) (2017 version) provides that in determining the tax residency of a person, certain factors need to be examined, such as:“Where the meeting of the person's board of directors or equivalent body is usually held, where the chief executive officer and other senior executives usually carry on their activities, where the senior day-to-day management of the person is carried on, etc.”

34. The Respondent averred that the relevant consideration for the place of management is where the high-level decision-making occurs or is made. In the Appellant's case, the above decisions were made by personnel sitting in Kenya, that is, the Directors and Board of Directors. It was observed that:a.Management activities and execution of the Appellant's customer contracts were largely undertaken by CTCL; andb.The Appellant did not undertake substantial activities other than marketing and sales, thus, did not own significant assets nor assume considerable risks.

35. The Respondent averred that a company may be a Kenyan tax resident corporation under common law rules. Common law rules state that a corporation is a resident in the location in which its Central Management and Control (CMC) is exercised because this is where the actual business of a corporation is carried on. The CMC test is based on Lord Loreburn's decision in the House of Lords in the United Kingdom in De Beers Consolidated Mines Ltd v. Howe (1906) AC 455. Therefore, even if a corporation is incorporated outside of Kenya, if management and control abide in Kenya, then the company is a resident for Kenya tax purposes.

36. The CMC test is a question of fact. One of the main factors to determine a corporation's "CMC" is the location in which the corporation's Board of Directors make their decisions. The reason why the Board of Directors are important is that the Board of Directors have the legal power to manage the affairs of the corporation. Thus, the residence of the Board of Directors will often decide the tax residence of a corporation.

37. The management functions of the Appellant were carried out in Kenya and not in UAE. The Respondent stated that the Board of Directors of the Appellant played a key role in all the strategic decisions of the company, and thus, the management and control of its affairs were exercised in Kenya. The Respondent concluded that the Appellant was tax resident in Kenya during the period 2018 to 2020 and thus was governed by the indices of the Kenya tax laws.

c. Whether the Appellant's accrued income during the period 2018 to 2020 was chargeable to tax in Kenya as provided under Section 3 and Section 4(a) of ITA 38. Section 3 of the ITA provides that income tax is chargeable for each year of income upon all income of a person, whether resident or non-resident, which accrued in or was derived from Kenya. The Appellant was a tax resident during the period 2018 to 2020; thus, income tax of whatever nature was chargeable on the income earned by the virtue that management and control was exercised in Kenya.

39. Further Section 4(a) of the ITA provides as follows:“For the purposes of section 3(2) (a) (i)-b.Where a business is carried on or exercised partly within and partly outside Kenya by a resident person, the whole of the gains or profits from that business shall be deemed to have accrued in or to have been derived from Kenya."

40. In view of the above, the Appellant's gains or profits were chargeable to tax in Kenya.

d. Whether WHT is chargeable on the payment made by the Appellant on management and professional fees as outlined in Section 35(1)(a) of the ITA 41. The Appellant made various payments relating to management fees, legal and professional fees, commissions, advertising and marketing, among others to resident and non-resident persons. Section 35(3) of the ITA requires that a person upon payment of an amount to a resident or non-resident person in respect of management or professional fee or training fee to withhold tax at the prescribed rates stipulated under the Third Schedule to the ITA.

e. Whether WHT is chargeable on payment made by the Appellant in respect of interest to a non-resident person under Section 35(l)(e) of the ITA. 42. The Appellant expensed finance costs relating to interest on intra-group financing and interest on bank credit lines to companies that are located in UAE.

43. Section 35(1) (e) of the ITA requires that a person upon payment of an amount in respect of interest to a non-resident person to withhold tax at the prescribed rates. The Appellant was therefore obligated to withhold tax at the rates stipulated under the Third Schedule to the ITA and Article 12 of the Treaty. Section 35(l)(e) provides as follows:“35. Deduction of tax from certain income(1)Every person shall, upon payment of any amount to any non-resident person not having a permanent establishment in Kenya in respect of—(d)............(e)interest and deemed interest…”

44. In response to grounds (a) and (b) of the Appellant’s Memorandum of Appeal and paragraph 10-23 of its Statement of Facts, the Respondent denied the Appellant’s contentions that it was not a tax resident in Kenya as it was evidential that the Appellant was tax resident in Kenya during the period 2018 to 2020.

45. The Appellant's Board meetings for the period 2018 to 2020 were held in Nairobi. None of the Board meetings were held in Dubai. Therefore, by virtue of the provision of the ITA and interpretation under common law, the Appellant was a resident in Kenya since the management and control of its affairs was exercised in Kenya.

46. The Respondent stated that the management and control of the Appellant's affairs were exercised in Kenya and its operations were conducted in Kenya during the period 2018 to 2020. The following are key functions that determined the success of the Appellant business. It was evidential that:a.All the Directors of the Appellant were situated in Kenya and were involved in the day-to-day running of the affairs of the company whilst in Kenya.b.A management team sitting in Kenya managed the affairs of the Appellant in performing the functions of approval of customers and customer orders: and negotiation and execution of agreements with customers, among others.c.CTCL and/or the regional manager for the Appellant signed customer orders/agreements on behalf of the Appellant. All obligations under the agreements were largely negotiated and carried out by CTCL.d.In relation to blended and straight-line tea shipped directly to the end customer and/or to Appellant: CTCL bore and managed risks until delivery.e.The shipping documents in relation to sales made by Appellant, in shipping documents, CTCL was specified as the invoicing and exporting party.f.CTCL transferred already existing customers to the Appellant under the DSO line.

47. The Appellant asserted that it was being managed by a manager sitting in UAE that was making all strategic decisions. The Respondent disagreed with that assertion and stated that the manager is a servant of the Appellant and only manages the company through the direction and resolutions of the Board of Directors. It was evidential that the actual strategic decisions of the Appellant were formulated by the Board of Directors sitting in Kenya.

48. The Respondent in replying to ground (c) of the Appellant’s Memorandum of Appeal and paragraph 24 of the its statement of facts affirmed that the Appellant had been making payments relating to management fees from CTCL, legal and professional fees, commissions, advertising, and marketing. Section 35 of the ITA requires that a person upon payment of an amount to a resident or non-resident person in respect of management or professional fee or training fee to withhold tax at the prescribed rates which are stipulated under the Third Schedule to the ITA.

49. The Appellant also expensed finance costs relating to interest on intra-group financing and interest on bank credit lines. Section 35(1) of the ITA requires that a person upon payment of an amount in respect of interest to a non-resident person to withhold tax at the prescribed rates which are stipulated under the Third Schedule to the ITA and Article 12 of the Treaty.

50. The Respondent in a reply to ground (e) of the Appellant’s Memorandum of Appeal and paragraph 24 of its Statement of Facts denied confirming assessments with no basis in fact or by law. The Respondent stated that the Appellant was established as a taxpayer in Kenya, thus, assessments were raised on the Appellant as per the provisions of Section 29 of the TPA.

51. Further, the Respondent stated that the objection decision was issued as provided under Section 51 of the TPA, that the tax implication was clear evidence that the objection decision was based on relevant documents and information that the Appellant was underserving of the prayers sought and that the Appellant did discharge its burden of proof that the place of effective management and control was in Dubai and not in Kenya.

52. The Respondent prayed that the Tribunal would hold that its objection decision dated 9th June, 2023 would be upheld and that the Appeal would be dismissed with costs.

Parties’ Submissions 53. The Appellant’s submissions dated 28th March, 2024 and filed on 4th April, 2024 were adopted as were those of the Respondent, dated and filed on 22nd April, 2024.

54. The Appellant submitted as follows:

55. That the Respondent's position was that it is resident in Kenya and the whole of the gains or profits were “accrued in or derived from Kenya". However, it was not resident in Kenya in the years of assessment and that in any case assuming they were resident, they did not satisfy the criteria set out in section 4(a) of the ITA.

56. KTDA Holdings Ltd is a private holding company owned by small-holder tea farmers. KTDA Holdings Limited owns and has a 100% stake in eight subsidiaries. One of the subsidiaries CTCL owns 100% of the Appellant. The Appellant is incorporated in the UAE and is a subsidiary of CTCL, a Kenyan subsidiary of KTDA Holdings Limited.

57. The Appellant submitted that it buys and sells teas for customers in the Gulf, Middle East, and other Commonwealth of independent states member countries. The Appellant sources the tea for sale using two channels: Direct sales from the tea factories, and starting in 2019, from the tea auctions. The key features of its operations include the following: The Appellant is incorporated in the UAE and is headed by the regional manager (supported by two staff).

The regional manager attends board meetings but is not a member of the board.

The Appellant signed a service level agreement with CTCL under which the latter offers several services to it including warehousing, storage, packaging, and delivery of tea. The Appellant pays CTCL management fees and buying commissions for its services.

all the members of the board are Kenyans and all their meetings, except two, were held in Kenya.

The Appellant has three members of staff comprising the general manager, marketing assistant and office assistant.

The Appellant bank accounts in Dubai and Kenya are operated by the regional manager.

The Appellant's books of accounts are audited by a UAE-based firm of auditors.

Customer contracting is done from Dubai.

58. Its Articles of Association allow its directors to delegate their powers as they think fit and such a person shall exercise the powers to, among others, exclusion of the directors. Relying on the provisions of the Articles of Association, the Appellant vested a broad and wide array of powers on the regional manager through a power of attorney.

59. The regional manager sat in and attended all board of the Appellant and was instrumental in the decisions the board made. The regional manager based in the UAE was the loci of and nerve centre of the Appellant's key policy and strategic decisions and these key policy and strategic decisions were made in the UAE and were executed and implemented by the regional manager.

60. The Appellant provided an overview of the following key legislative provisions it had relied on in making its submissions:Section 2(1) of the ITA which provides as follows:"resident", when applied in relation to "a body of persons" means-i.that the body is a company incorporated under a law of Kenya; orii.that the management and control of the affairs of the body was exercised in Kenya in a particular year of income under consideration; oriii.that the body has been declared by the Cabinet Secretary, by notice in the Gazette, to be resident in Kenya for any year of income.”

61. Section 4(a) of the ITA discusses further, the issue of residence and their taxation:“Section 4. Income from businessesFor the purposes of section 3(2)(a)(i)-(a)where a business is carried on or exercised partly within and partly outside Kenya by a resident person, the whole of the gains or profits from such business shall be deemed to have accrued in or to have been derived from Kenya.”

62. Section 35 of the ITA deals with withholding tax. The relevant sections concerning this matter are set out below:“deduction of tax from certain income1. Every person shall, upon payment of any amount to any non-resident person not having a permanent establishment in Kenya in respect of-(a)a management or professional fee or training fee except-……………………………………………………………………………………………………………………………………(e)interest and deemed interest.

Tax Treaty 63. Article 4 of the Treaty defines and discusses residence and states as follows:“Article 4-resident1. For the purposes of this Agreement, the term "resident of a Contracting State" means:a.In the case of Kenya any person who under the laws of Kenya, is liable to tax therein by reason of his domicile, residence, place of effective management, place of incorporation or any other criterion of a similar nature. This term does not include any person who is liable to tax in respect only of income from sources in Kenya;b.in the case of the United Arab Emirates:i.An individual who under the laws of the United Arab Emirates or of any political subdivision or local government thereof is a national;ii.Any person other than an individual that is incorporated or otherwise recognized under the laws of the UAE or any political subdivision;iii.or local government thereof.4. Where by reason of the provisions of paragraph 1 of this Article a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident of the State in which its place of effective management is situated.”

64. The Appellant identified three issues for determination which it proceeded to analyse as below.

i. Whether the Appellant was a resident of Kenya. 65. The submission of the Appellant was that its residence would determine the extent to which it came within the charge to Kenya’s corporation tax regime. Kenya resident companies are taxable on their whole gains or profits if, in terms of section 4 (a), their "business is carried on or exercised partly within and partly outside.”

66. The Treaty has an overriding effect with respect to the ITA. Under Article 4(1) of the Treaty, a company is a resident in Kenya if they are liable to tax by reason of, among others, residence, place of incorporation and place of effective management. Similarly, under Article 4(1), a company is a resident in the UAE by dint of incorporation or if the law so says.

67. The Appellant qualifies as a resident of both Kenya and the UAE because of incorporation. Article (4) of the Treaty contains a tie-breaker clause to determine for the purposes of the relevant treaty, the tax residence of a company which is resident in both Kenya and UAE under their respective domestic laws.

68. The Appellant submitted that Article (4) of the Treaty, is a tie-breaker clause, and provides that where a Company has residence in both countries, the Company is deemed to be a resident of a country where it has a place of effective management (POEM). The definition of Article 4(1) leads to a situation where a person other than an individual being treated as a resident of both Contracting States then Article 4(3) provides a tie breaker based on the person's place of effective management ("POEM").

69. The Treaty does not contain a definition for the POEM and in the absence of a definition of POEM in the tax treaty, reference should be made to case law and the OECD Model Tax Convention (OECD MTC) and Commentary. The Kenyan courts have implicitly approved the use of the OECD Model. Regarding this, article 4(3) of the OECD Model Tax Convention provides as follows:“Where a person other than an individual is resident of both Contracting States, then it shall be deemed to be a resident [only] of the State in which its place of effective management is situated.”

70. The Appellant submitted that the meaning of POEM is not defined in article 4(3) but paragraph 24 of the OECD Commentary on article 4(3), offers some guidance on the meaning of the concept. The paragraph states as follows:“the place of effective management is the place where the key management and commercial decisions that are necessary for the conduct of the entity’s business are in substance made. The place of effective management will ordinarily be the place where the most senior person or group of persons (for example a board of directors) makes its decisions, the place where the actions to be taken by the entity as a whole are determined; however, no definitive rule can be given, and all relevant facts and circumstances must be examined to determine the place of effective management. An entity may have more than one place of management, but it can have only one place of effective management at any one time.”

71. A long line of cases has held that "the top-level management of a company is usually carried out by its board of directors (as the Commentary suggests) unless it can be shown that the control of the company's affairs was effectively usurped and exercised by some third party and that the directors were content merely to rubberstamp the decisions which were taken." At Paragraph 49 of the case Commissioners for Her Majesty's Revenue and Customs and Smallwood & Anor [2010] EWCACiv778.

72. The case of De Beers Consolidated Mines Ltd v Howe (1906) AC 455 contains the best description of the center of management and control. The Court held that that a company resides where its real business is carried on and the real business is carried on where the central management and control is. This decision has been quoted with approval in Tax Appeal No 934 of 2022, NaivasKenya Limited v Commissioner of Domestic Taxes and Tax Appeal No. 65 OF 2023: M-Kopa LLC (C/o M-Kopa Kenya Limited v Commissioner for Domestic Taxes.

73. In contrast to the above decisions, this is a case in which de jure and de facto control was actively exercised in the UAE, while the local directors "stood aside" from their directorial duties. Footnote 12, of the case Development Securities Plc & Others V the Commissioners for Her Majesty's Revenue and Customs, UT/2017 /0170 and Bullock V. Unit Construction Co. Ltd. [1956 J. 2142].

74. The Appellant contended that the POEM was in the UAE because the regional manager based in the UAE was the loci of and nerve center of the Appellant's key policy and strategic decisions and these key policy and strategic decisions were made in the UAE and were executed and implemented by the regional manager. The evidence included:a.The Articles of association of the Appellant allow the directors to delegate their powers as they think fit and such a person shall exercise the powers to, among others, exclusion of the directors.b.Relying on the provisions of the Articles of association, the Appellant vested a broad and wide array of powers on the regional manager through a power of attorney.c.The regional manager sat in and attended all Board of the Appellant and was instrumental in the decisions the Board made.d.all the members of the Board are Kenyans and all their meeting, except two, were held in Kenya.e.The Appellant has three members of staff comprising the general manager marketing assistant and office assistant.f.The Appellant bank accounts in Dubai and Kenya and these are operated by the regional manager.g.The Appellant's books of accounts are audited by a UAE based firm of auditors.h.Customer contracting done from Dubai.

(ii) Whether the Appellant satisfied the test in section 4(a) of the ITA. 75. In terms of section 4(a), for the purposes of section 3(2)(a)(i)-“(a)where a business is carried on or exercised partly within and partly outside Kenya by a resident person, the whole of the gains or profits from such business shall be deemed to have accrued in or to have been derived from Kenya.”

76. The Appellant's case is that they did not' have residence in Kenya. However, in the unlikely event the Tribunal finds it had residence, the Appellant asserts it did not meet the criteria under section 4(a) and for this reason it did not have a tax liability.

77. What does ''business is carried on or exercised partly within and partly outside Kenya" mean? To establish whether a resident is carrying on business in Kenya in such a way as to become subject to Kenyan income tax under the Act, it is necessary to determine, in the first place, whether he "carries on or exercises a business" and, in the second place, whether he carries on that business "partly within and partly outside Kenya."

78. In other words, there must be a "business", the business must be "carried on or exercised" and the business must be carried on "partly within and partly outside Kenya", where within implicates the geographical boundaries of Kenya. If it is shown that a resident company carries on business partly within and partly outside Kenya, then its entire profits are taxable in Kenya.

79. In terms of section 2(1), a "business" includes any trade, profession or vocation, and every manufacture, adventure, and concern in the nature of trade, but does not include employment. The definition is very wide and intends to capture anything that falls within the conception of general business.

80. The Act has not given an indication on the scope and boundaries of section 4(a) of the ITA. Unfortunately, there is no Kenyan case that gives guidance regarding when a business is partly carried on in Kenya. Much of the case law is drawn from the UK and overall, these cases are persuasive in Kenya.

81. Criteria found to be relevant by UK courts when determining whether a person "carries on business in Kenya' include entering into contracts in Kenya, the existence of bank accounts in Kenya, the place of delivery, and the location of inventory and business activity carried out in Kenya resulting in the realization of profit.

82. To be precise, the contracts were concluded in the UAE, the profits were generated in the UAE, the bank accounts were in the UAE, the goods were delivered in the UAE and the inventory is stored in the UAE. Most case law point to entering into contracts in Kenya as generally the most determinative. As Lord Watson expressed the point in Grainger & Son v Gough [1896] AC 325 at 340:“I agree with the opinion expressed in [Erichsen v Last 8QBD 414 at 420} that whenever a foreigner, either by himself or through a representative in this country, ''habitually does, and contracts to do, a thing capable of producing proftt, and for the purposes of producing profit, he carries on a trade or business," and that the profits or gains arising from these transactions in the United Kingdom are liable to income tax.”

83. Also, Lord Herschel underscored this in Grainger & Son v Gough [1896] AC 325 at 336:“Something more [than soliciting and selling to UK customers] must be necessary in order to constitute the exercise of a trade within this country. How does a wine merchant exercise his trade? I take it, by making or buying wine and selling it again with a view to profit. If all that a merchant does in any particular country is to solicit orders, I do not think he can reasonably be said to exercise or carry on his trade in that country. What is done there is only ancillary to the exercise of his trade in the country where he buys or makes, stores, and sells his goods.”

84. An analysis of the Appellant's operations showed that its business operations were fully carried on or exercised in the UAE and so the gains or profits are not taxable in Kenya.

(iii) Whether the Appellant is therefore liable for income tax for the years 2018 to 2020. 85. The Respondent demanded Kshs. 79,672,323. 00 in respect of Corporation tax which was inclusive of interest and penalties. The Appellant’s position was that the reasons it set out removed it from liability for the amount.

86. The Respondent demanded Kshs. 40,421,188. 00 in respect of Withholding Tax which was inclusive of interest and penalties. It was the Appellant’s position that the reasons set out removed it from liability for the amount.

87. The Tribunal notes that it will not rehash the submissions of the Respondent as the same were a reiteration of its statement of facts.

Issues for Determination 88. The Tribunal having carefully considered the parties’ pleadings, documentation and submissions has identified three issues for determination as follows:a.Whether the Appellant was resident in Kenya for tax purposes.b.Whether the Appellant’s operations are exclusively carried out in the UAE.c.Whether the objection decision dated 9th June, 2023 was justified.

Analysis and Findings 89. Having identified the three issues for determination the Tribunal will proceed to analyse them as follows:

(a) Whether the Appellant was resident in Kenya for tax purposes. 90. The dispute herein arose from a default notice issued by the Respondent pursuant to Section 29 of the TPA. The Respondent had contended that the Appellant was resident in Kenya for the years 2018 to 2020 and that therefore it had incurred a total tax bill of Kshs. Kshs. 122,672,965. 00 in respect of corporation tax and withholding tax. The Appellant sought to dispute the assertions of the Respondent.

91. The main connecting factors in assessing a person to tax are “source” and “residence.” Both principles are linked to the public international law concepts of “territoriality” and “nationality”. ‘situs’ which relates to the location of assets is also part of these concepts and is important for the purposes of establishing whether a taxpayer can be assessed to tax in a particular jurisdiction. Residence has different meanings in different jurisdictions and in Kenya the term “residence” is defined in section 2 of the ITA as follows:“resident", when applied in relation—b)to a body of persons, means—(i)that the body is a company incorporated under a law of Kenya; or(ii)that the management and control of the affairs of the body was exercised in Kenya in a particular year of income under consideration; or(iii)that the body has been declared by the Minister, by notice in the Gazette, to be resident in Kenya for any year of income;”

92. In the instant case, the Tribunal is of the view that the Appellant, having been registered in Dubai, cannot be construed to be resident in Kenya by virtue of its registration or incorporation and accordingly, in determining the Appellant’s residence the second test will apply. The second test would be for the Tribunal to consider whether the management and control of the affairs of the Appellant were exercised in Kenya between the years 2021-2022, the period for which it was issued with a default assessment notice by the Respondent.

93. The Tribunal notes that the ITA does not appear to interpret or define the term “management and control” but provides the following definition of the term “control” in section 2 of the ITA:“control", in relation to a person, means—(a)that the person, directly or indirectly, holds at least twenty per cent of the voting rights in a company; [emphasis ours](b)a loan advanced by the person to another person constitutes at least seventy per cent of the book value of the total assets of the other person excluding a loan from a financial institution that is not associated with the person advancing the loan;(c)a guarantee by the person for any form of indebtedness of another person constitutes at least seventy per cent of the total indebtedness of the other person excluding a guarantee from a financial institution that is not associated with the guarantor;(d)the person appoints more than half of the board of directors of another person or at least one director or executive member of the governing board of that person;(e)the person is the owner of or has the exclusive rights over the knowhow, patent, copyright, trade mark, licence, franchise or any other business or commercial right of a similar nature, on which another person is wholly dependent for the manufacture or processing of goods or articles or business carried on by the other person;(f)the person or a person designated by that person—(i)supplies at least ninety per cent of the supply of the purchases of another person; and(ii)upon assessment, the Commissioner deems influence in the price or other conditions relating to the supply of the purchases of another person;(g)the person purchases or designates a person—(i)to purchase at least ninety per cent of the sales of another person; and(ii)upon assessment, the Commissioner deems influences in the price or any other conditions of the sales of another person;(h)the person has any other relationship, dealing or practice with another person which the Commissioner may deem to constitute control;”

94. The Tribunal notes that since the Appellant was a wholly owned subsidiary of CTCL and its regional manager was also appointed by CTCL, it is evident that it is on that basis controlled by CTCL.The Tribunal further notes that though statute does not define “management” separately or together with the term “control” it would have to rely on the judicial interpretation of the same and a variety of case laws have achieved with some level of success, clarification of the meaning of “management and control”. In some jurisdictions the concept is referred to as “central management and control” in others “central mind and management”. In Kenya the concept that is to be defined is “management and control of the affairs of the body”.

95. In this regard the Tribunal is persuaded by the holding in the case of Wood v Holden CA 2006, 78 TC 1; [2006] STC 443; [2006] EWCA Civ 26; [2006] 1 WLR 1393 where a couple, in a bid to avoid capital gains tax on shares entered into a sophisticated scheme to avoid capital gains tax on a share disposal. Under the scheme, the shares were transferred to a company incorporated in British Virgin Islands, and then transferred again to a subsidiary incorporated in Netherlands. The Revenue Authority issued assessments on the basis that central management and control of the Dutch company was exercised in the UK. The couple appealed, contending that the company was resident in Netherlands. It was held that, on the evidence, the company was resident in Netherlands, since its 'central management and control' was in Amsterdam, where its board meetings were held.

96. The Tribunal having reviewed the cited cases notes that some principles ought to be established on how to determine where the management and control of affairs of an entity is carried out. The Tribunal also notes that it is evident from the cases that the test is not in relation to the source of the decisions but it would be important to identify which entity makes the final decision or where the final decision is made. Decisions of management are made by directors who are construed in law to be the managers of such a body of persons. The duties and the guidelines for Directors as well as their powers are normally outlined in the Articles of Association of the entity, as the Appellant had rightly indicated in its pleadings.

97. The Tribunal further notes, having reviewed a variety of cases, that test takes variations and may be referred to in different ways, for example in some jurisdictions, the test is the “company seat”; in others “legal seat” or “statutory seat” but ultimately, the test focuses on the place where central management and administration is exercised and this can include the place where the day to day operations are managed.

98. The Tribunal notes that in the instant case, the Appellant was incorporated in Dubai and a regional manager was employed to run the entity, with full authority of the Board of Directors based in Kenya. The regional manager was granted a power of attorney. The Tribunal notes that the power of attorney is an instrument that allows a person to act on behalf of another. The view of the Tribunal is that the power of attorney was issued by the Board of Directors who were based in Kenya, to the regional manager, who was their employee to ease their management functions of the directors of the entity in Dubai.

99. The Tribunal notes, having reviewed the Minutes that were presented as evidence, that the regional manager would attend the board meetings of the Appellant in his capacity as a senior employee. The power of attorney was not proof that the regional manager was a strategic decision maker or that his decisions were final. The regional manager would report to the Board of Directors. the view of the Tribunal in this regard would be that the decisions would be in relation to his duties as an employee.

100. The Tribunal must therefore determine if the regional manager was guided by the Board of Directors of the Appellant in making the management decisions. The evidence adduced by the Appellant in terms of the Board minutes is reflective of the fact that the regional manager was not fully independent but would be instructed by the final and strategic decision maker, the Board of Directors. The Tribunal also notes that a majority of the meetings of the Board of Directors was held in Nairobi, Kenya.

101. In the case of Laerstate BV vs. HMRC (2009) UKFTT 209 TC the learned judge held that the management and control function of a taxpayer would be where the board meetings are held where a company is managed by its directors in board meeting(central). However, if the management is outside the board meetings, then one needs to consider who is managing the company by making high-level decisions (strategic decisions). In the instant case based on the contents of the minutes of the Board meetings, the management decisions are made during the Board meetings held by the Board of Directors of CTCL.

102. Further, in the case of De Beers Consolidated Mines Ltd vs. Howe (1906) AC, 455,5 TC 198 it was established that a company resides for tax purposes where its real business is carried out. The real business of a company is carried out, not where the trading operations are taking place but where the central management and control of its business actually takes place. In Naivas Kenya Ltd Vs Commissioner of Domestic Taxes (Tat Appeal 934 of 2022) the Tribunal established that the Appellant was managed and controlled in Kenya. In Union Corporation Ltd vs. Commissioner of Inland Revenue 34 TC 207, the Court held as follows:“The Company may be properly found to reside in a country where it “really does business” that is to say, where the controlling power and authority which according to the ordinary constitution of a limited liability company, is vested in its board of directors, and the exercise of that power and the authority, is to some substantial degree to be found”.

103. In the case of Bullock vs. Unit Construction Company (1959) 38 TC 712, the court held that the issue of management and control was “a pure question of fact, to be determined … upon scrutiny of the course of business and trading”.

104. The Tribunal’s finding is that in the instant case, the Appellant was managed and controlled from Kenya since its Board Meetings, the organ through which it made both its strategic and final decisions on the management of the Appellant, were held in Kenya. The Tribunal further finds that the regional manager was the employee of the Appellant and was running the entity in Dubai on behalf of CTCL which was in full management and control of the affairs of Appellant on account of the fact that it fully owned the Appellant and was the beneficial owner.

105. Accordingly, the Tribunal’s finding is that the Appellant was resident in Kenya for tax purposes.

(b) Whether the Appellant’s operations are exclusively carried out in the UAE. 106. The Appellant submitted that even if it was found to be resident in Kenya for tax purposes as the Tribunal has already determined, it did not satisfy the criteria as set out in section 4 (a) of the ITA. Section 4 (a) of the ITA provides as follows:“4. Income from businessesFor the purposes of section 3(2)(a)(i)—(a)where a business is carried on or exercised partly within and partly outside Kenya by a resident person, the whole of the gains or profits from such business shall be deemed to have accrued in or to have been derived from Kenya; ….”

107. The Tribunal’s view is that the Appellant is carrying on business partly within and partly outside Kenya. Pursuant to section 2 of the ITA, a business includes any trade , profession or vocation and every manufacture , adventure and concern in the nature of trade and does not include employment. The Appellant signed a service level agreement with CTCL , its parent company. which was adduced as evidence by the Appellant. Accordingly, the further view of the Tribunal in this regard is that the assertion of the Appellant that an analysis of its operations showed that its business operations were solely carried on or exercised in the UAE, was incorrect.

108. The Tribunal notes that Section 4 (a) of the ITA applies in this instance and though the provisions of the Treaty, would override those of the ITA, in the instant case, there is limitation of benefits of the Treaty to the Appellant pursuant to the following provisions of Section 41 (2) and (3) of the ITA :“41. Special arrangements for relief from double taxation(1)…………………………………(2)Subject to subsection (3), where an arrangement made under this section provides that income derived from Kenya is exempt or excluded from tax, or the application of the arrangement results in a reduction in the rate of Kenyan tax, the benefit of that exemption, exclusion, or reduction shall not be available to a person who, for the purposes of the arrangement, is a resident of the other contracting state if fifty per cent or more of the underlying ownership of that person is held by a person or persons who are not residents of that other contracting state for the purposes of the agreement….(3)Subsection (2) shall not apply if the resident of the other contracting state is a company listed in a stock exchange in that other contracting state.(4)In this section, the terms "person" and "underlying ownership" have the respective meanings assigned to them in the Ninth Schedule.”

109. In view of the fact that CTCL, a Kenyan entity has direct underlying ownership of 100% of the shareholding of Appellant, the Appellant’s ability to derive benefit from the provisions of the Treaty is limited by section 41 of the ITA. Consequently, the Tribunal’s finding is that the provisions of section 4 (a) of the ITA apply since the Appellant’s operations are not exclusively carried out in the UAE.

(c) Whether the objection decision dated 9th June, 2023 was justified. 110. The Tribunal having found that the Appellant was resident for tax purposes in Kenya, also finds that the taxes demanded were due and payable and that the objection decision by the Respondent dated 9th June, 2023 was justified.

Final Decision 111. The upshot of the foregoing is that the Appeal is not meritorious and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The objection decision dated 9th June, 2023 be and is hereby upheld.c.Each party to bear its own costs.

112. It is so Ordered.

DATED AND DELIVERED AT NAIROBI THIS 25TH DAY OF OCTOBER, 2024. …………………………CHRISTINE A. MUGA - CHAIRPERSON……………………BONIFACE K. TERER - MEMBER……………………DELILAH K. NGALA - MEMBER…………………………OLOLCHIKE S. SPENCER - MEMBER